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FRM Part I · FRM Exam Part I · Corporate Bonds

Company X issues USD 200 million of bonds through a firm commitment underwriting. The underwriter buys the whole issue at 98.50 per 100 face value and resells it to investors at 100. What is the underwriter's gross spread in USD if all bonds are sold at 100?

The gross spread is USD 3.0 million. The underwriter buys at 98.50 and sells at 100, earning 1.50 per 100 face value, or 1.5%. Applied to a USD 200 million issue, this gives 0.015 times 200 million, which equals USD 3.0 million.

  1. AUSD 1.5 million
  2. BUSD 3.0 millionCorrect
  3. CUSD 2.0 million
  4. DUSD 0.75 million

Explanation

Spread per 100 = 100 - 98.50 = 1.50, i.e. 1.5%. On USD 200 million this is 0.015 x 200 = USD 3.0 million. The USD 1.5 million option uses 1.5 as if it were in millions without scaling by the issue size (treating 0.75% of issue size).

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